Keep Calm (And Stay Invested?)

Welcome to this week's edition of Cape May Wealth Weekly. If you're new here, subscribe to ensure you receive my next piece in your inbox. If you want to read more of my posts, check out my archive. This piece revisits an article I wrote almost two year ago on the psychology of market entry.

One year ago last week, on April 9, 2025, the S&P 500 recorded one of the most extraordinary single days in its post-WWII history. The index surged by 9.5%, its biggest one-day gain since 2008 and the third-largest since the Second World War.

As it happens, the pattern repeated itself almost exactly a year later, last week, in a somewhat different form. On April 8, markets surged sharply after President Trump announced the night before a two-week pause on military operations against Iran, with the Strait of Hormuz set to reopen and oil prices tumbling. The Dow posted its best day since April 2025.

Both events had striking parallels. A different crisis, a different catalyst, but a similar underlying dynamic: a policy announcement delivered via social media, a relief rally that moved faster than almost anyone could react to, and markets left to grapple the next day with whether any of it would actually hold.

The seemingly obvious lesson, and the one you'll hear from most of our advisor peers: stay invested. If you had moved to cash during the worst days of early April (the -4.8% drop on April 3, followed by -6.0% on April 4), you almost certainly missed the single best day since 2008. Proof, as many asset managers and banks like to show with charts, that missing the “best days” in the market costs you dearly over the long run - and that you are instead better served by doing nothing.

We don’t disagree - quite the opposite, actually. But it might also be a simple conclusion, which is missing a more interesting, and more honest, question.

The Limitations of “Staying Invested”

I will admit - it is hard to make good counterarguments against the “best days” analysis. For example, I could point to the fact that it is very unlikely that an investor will just miss out on the best days while miraculously being invested in all the bad days that come ahead of it. Or that many investors might actually not consciously ‘stay invested’ during such short, strong drawdowns (and subsequent strong recoveries), but are simply in a state of shock and end up simply being too slow to act. Or that it’s not applicable to individuals who are not yet in the market but looking to buy in (more on that below). Either way, the argument holds directionally true - you are likely better off by not ‘panic-selling’ on days with short, hard corrections, as we saw this year and last year. 

I’m not a fan of blindly accepting investing ‘best practices’, encouraging our clients to always take a closer look at why they should (or should not) accept something for granted. But the consequence of the “best day” analysis, staying invested, is admittedly one of the better rules to go by.

What we can take a closer look at is the psychological questions around staying invested. Why did an investor end up exiting the market? In most cases, the answer is not that they made a sophisticated macro call, or that their financial advisor hadn’t shown them those beautiful “best/worst days” analysis slides. Rather, at least in our experience, it is that their portfolio - or more precisely, its risk level - was not correctly set up for their risk tolerance and preferences in the first place. Staying invested only works as advice if the level of risk in your portfolio is actually right for you - in more than one sense.

The first scenario of a wrong risk level is the one we described above - an investor who sells during the lows of a correction, missing out on the recovery. On the surface this looks like a market timing mistake, and in some sense it is. But most investors who are already fully invested (more on that below) typically don’t plan to tactically adjust their market allocation - so rather, in this case, it is a planning failure, with the client feeling like they have to sell because their portfolio was riskier than they were able to handle. When the drawdown, previously only a hypothetical metric presented to them by their financial advisor, actually arrived, they found that it was more than they could stomach, and ended up selling. An advisor can sometimes intervene in that moment, but if they truly have to intervene to keep a client from selling (rather than just calming their nerves in choppy markets, as we do as well), the overall planning has already failed. The right conversation about risk should’ve happened before the correction, not during it.

But there is also a second, more subtle scenario, which is more common than people like to admit. This is the investor who does stay invested, holding through a 30% or 40% drawdown without selling, and who will tell you proudly that they are a long-term thinker with a high risk tolerance. And perhaps that is true psychologically. But there is a difference between the risk a client can emotionally tolerate, and the risk their financial plan actually can (or at least should) absorb. A 50% drawdown on a 100% equity portfolio might not cause someone to panic and sell. It might not even particularly disturb their sleep. But if they are drawing on that portfolio to fund their cost of living, or if they have a significant outflow (i.e. a property purchase, outstanding capital calls, or a tax bill) in the near future, that same drawdown can be genuinely devastating to their long-term plan, regardless of how calmly they sat through it. We see this fairly often: Clients who describe themselves as long-term and risk-tolerant, and genuinely mean it, but who have not fully worked through what a 40% or 50% shock would actually mean for their specific financial trajectory. 

The practical implication of both of these cases is the same: getting the risk level right from the outset is just as important as any decision made during the volatility itself. Which is, of course, exactly the kind of thing that is worth thinking through carefully before the next April 2025 arrives. 

How You Enter the Market Still Matters

Two years ago, I wrote about the hidden psychological risk of market timing - and specifically, the question of how to enter the market with a one-off investment (a “lump sum”). Mathematically, a single-tranche investment (putting everything in at once) has the highest expected return. An unsurprising outcome if you think about it - being invested more quickly in assets which historically, on average, have gone up more than they’ve gone down means that the faster approach will in most cases offer a higher expected return. 

But it also carries the most psychological risk. A painful start, like investing all your money right before a 20% drawdown, does not just hurt in the short term. It can permanently alter how someone thinks about capital markets, causing them to miss years of compounding while sitting on the sidelines. Hence the case for tranching to perhaps not improve your average entry price but to make the experience of market entry a bit more easy to stomach.

That argument holds up. But April 2025 surfaced something we didn't fully address at the time, and it's worth naming directly.

Most investors who choose a tranching approach have thought carefully about the entry plan itself - how many tranches, over what period, how much per month. What very few have thought through is what they should do if a sharp correction arrives while they are partway through that plan. They think that they will act decisively - but as with our ‘planning failure’ of being unable to stay invested, we might also lose out on potential upside by not really thinking through what we would do in such a scenario. Because the answer, at least in our view, is maybe not as obvious as you might think.

Consider an investor in early 2025 who was three tranches into a planned six-month entry. They were following a sensible, pre-committed plan, and happy to buy into a slightly declining market rather than a massive upside rally as we’d seen in prior years. 

But then came the first week of April. 

Those aforementioned back-to-back daily declines of –4.8% and –6.0%, the worst two consecutive days since 2020, with the S&P 500 briefly approaching bear market territory and the VIX trading above 50 - a level only reached twice in the prior fifteen years. Suddenly, their remaining three tranches could be deployed at prices meaningfully below where they started. The market was offering them something. But what should they do?

The options are straightforward to list, but not as easy to act on. Accelerate the remaining tranches and buy cheaper, slow down and wait for clarity, or hold course and stick to the original schedule. In our experience, the vast majority of investors - even those with a thoughtful tranching plan - end up in a kind of paralysis. The correction feels too uncertain to lean into, but also too unsettling to ignore. They neither accelerate nor slow down, they just freeze. And in most cases, April 9th passes before they've made any decision at all.

My answer, then and now, is that holding course is usually right, but that the far more valuable thing is to have decided in advance what the exception looks like. Not in the abstract sense of "I might accelerate if it falls a lot," but with enough specificity to actually act on. Something like "if the market falls more than 15% from my initial entry tranche, I will deploy my remaining capital over the following two weeks rather than the original schedule." That level of pre-commitment gives the investor a rulebook that exists before the stress arrives - which is the only moment a rulebook is actually useful. Made in the middle of a correction, the same decision is nearly impossible to execute calmly. 

At the very least, you might consciously deviate from the rule you set for yourself - but can later ‘audit’ why you made that choice, and if it turned out to be the correct call. Or if it’s like our earlier example of not being able to stay invested - maybe you didn’t want to buy more because you actually felt fine with your risk level (i.e. your allocation to equities and other riskier assets), and would’ve rather kept the ‘stability’ of cash or safer assets. (If you're in the middle of deploying a lump sum and wondering how to think about your entry plan, that's exactly the kind of question we work through with clients. Reach out.)

When To Maybe Not Stay Invested

Let us finish this article with a few thoughts on the counterpoint to our aforementioned ‘mantra’. What are the cases when you should not stay invested? When you actually should sell some of your positions? Let’s discuss a few examples.

First, when it endangers your financial goals, or the counterpoint, when selling actually would support them. See the example I gave in our recent practical review of how we apply the Aspirational Investor Framework. A client we worked with fit the second example we gave in the earlier section - generally willing and able to take on risks and invest for the long term. But his actual situation, or more precisely, his financial runway, was simply too short to take on the risk of staying invested in equities. So while we realized some taxes, and maybe didn’t have the very best ‘macro timing’, the best decision for him was actually to reduce his risk.

Second, for non-diversified instruments. Individuals see the “best/worst days” analysis, which is based on broadly diversified equity indices, and apply them to their individual stocks. Failed gold miners, formerly high-flying tech stocks, and other “YOLO trades” stand in their portfolio with a 90% loss, but they hold on to them - after all, they should stay invested, since that stock could make a recovery back to its old levels.

Besides the fact that that is unlikely from a quantitative standpoint (a position with a 90% loss needs to return 10x just to break even), it is also a bit of a misunderstanding. While equity indices as a whole have generally (but not always!) recovered at some point (remember that MSCI World took 10+ years to see its 2001 ‘tech bubble’ peak value again), that is not the case for individual stocks. They might simply never return to their earlier highs, or might even go further down. A stock that is down 90% can go down 90% again. Don’t hold onto a position just because it’s down, because you should stay invested - do your research and know if it’s worth holding on to, or if your capital could be better deployed elsewhere.

Third and last, for risk management purposes. It is the framework that our colleague Markus built his asset management firm prior to Cape May around. It is not market timing, i.e. the attempt to sell out before the rapid corrections only to buy back before the big recovery. That is extremely difficult, if not basically impossible. But in our view (and backed by research!), there are certain times in the market (so-called regimes), where at least from a quantitative standpoint, it might make sense to reduce your allocation to certain asset classes. Not to generate higher returns - but to reduce risk, i.e. volatility and drawdown risk.

But that deserves an article on its own - stay tuned for more information on that in the near future.

Not sure whether your current portfolio is set up to weather the next April - not just emotionally, but financially? 

Getting the risk level right before the correction arrives is exactly what we help clients do. We'd be happy to take a look at your setup and give you an honest second opinion.